Side Hustle Taxes: Everything You Need to Know Before the IRS Comes Knocking

When do you owe taxes on a side hustle?

Federal rule: if you earn $400 or more in net profit from self-employment in a year, you must file a tax return and report it. Net profit means after business expenses, not your gross revenue.

This is true whether you receive a 1099 form, get paid in cash, or use a payment app like Venmo or PayPal. The IRS doesn't care how you got paid — they care that you got paid.

The self-employment tax

When you're a W-2 employee, your employer pays half of your Social Security and Medicare taxes (7.65%) and you pay the other half. When you're self-employed, you pay both halves — 15.3% total — on top of regular income tax.

This is the part that catches people off guard. A $10,000 side hustle isn't really worth $10,000 to you. After self-employment tax (15.3%) and your federal income tax bracket (often 12–22%), you might keep $6,500 to $7,000.

Deductions available to side hustlers

Good news: as a self-employed person, you can deduct legitimate business expenses, which reduces your taxable income. Common ones:

• Home office (a percentage of rent, utilities, and internet, based on the square footage you actually use for work).
• Equipment: laptop, camera, tools.
• Software subscriptions: design tools, accounting software, AI tools used for work.
• Mileage driven for business at the standard IRS rate.
• Phone bill (the business-use percentage).
• Health insurance premiums if you're self-employed full time.

Keep receipts and a simple spreadsheet. The IRS is much more forgiving when you have records.

Quarterly estimated taxes

If you expect to owe more than $1,000 in taxes from your side hustle, the IRS wants you to pay throughout the year — not just in April. You make estimated payments four times a year: April 15, June 15, September 15, and January 15.

Skip them and you may owe an underpayment penalty (small, but annoying). The easy fix: estimate your tax bill, divide by four, pay that much each quarter on IRS.gov.

The SEP-IRA: a hidden side-hustler superpower

A SEP-IRA is a retirement account specifically designed for self-employed people. You can contribute up to 25% of your net self-employment earnings, up to $69,000 per year (2024). Contributions reduce your taxable income today.

Translation: side hustle income can fund a retirement account that shrinks your tax bill at the same time. It's a small business owner cheat code that almost no one in their 20s uses.